It’s fashionable to be glum about China right now. Harvard University professor Ken Rogoff, along with hedge fund managers Hugh Hendry and Jim Chanos are among those predicting catastrophe or slump for the world’s second largest economy.
In their view, the Chinese government over-egged its post-crisis pudding, with low interest rates and loose credit markets stoking up an orgy of reckless lending by the nation's banks. The China sceptics warn that this will end in tears--with the bursting of the country's property bubbles, a stalled economy and a damaged banking sector.
Earlier this year James Rickards, head of market intelligence at consulting firm Omnis, told a conference in Hong Kong that: "As I see it, it is the greatest bubble in history with the most massive misallocation of wealth. [China] is a bubble waiting to burst."
However not everyone is this gloomy about China. Indeed Chinese equities, having fallen by 22% this year on unrealised fears that Beijing would tighten monetary policy, are being tipped as a buy by investment commentators.
Chris Mayer recently suggested that China--which officially overtook Japan as the world’s second largest economy in July--remains highly promising for equity investors. Writing on the Penny Sleuths website, Mayer sang the praises of Fidelity's Anthony Bolton, who last year came out of partial retirement to launch a new Chinese equities fund.
Bolton, who has written a viewpoint for QFINANCE, launched the Fidelity China Special Situations Fund on April 19, having raised £460 million from retail investors. Mayer tips the fund as a strong potential performer. This is because of Bolton’s stockpicking skills--which should ensure he can generate value by investing in undervalued firms--and the wider macro-economic picture. Mayer is confident China will make a faster-than-expected transition from export-dependency to domestic demand-dependency.
Bolton (and Mayer) believe Chinese consumers are poised to go on a massive spending spree as they aspire to buy homes, cars, and household goods. Mayer said the switch to domestic consumer consumption is: "happening much faster--and in a much bigger way--than the general market seems to believe ... The key point is that hundreds of millions of people will be joining China’s middle class over the next five years."
Mayer added that in a market such as China, superior bottom-up stock picking skills come to the fore: "Suspicions of fraud hover around the edges of newly minted China shares… This cloud depresses stock prices, too. An investor can lower the fraud risk by being very picky and doing a little extra due diligence. A few rotten apples don’t spoil the whole bushel."
However, other commentators have criticised Bolton for lacking imagination. The Special Situations Fund has loaded up on mainstream financials and blue chip “A” shares--companies like China Mobile and the Industrial and Commercial Bank of China, both at 6.3%--rather than digging out little-known growth opportunities. Critics are even accusing him of having become a closet index-tracker.
Yet Bolton clearly has faith in his formula. He recently leveraged up the Fidelity China Special Situations Fund, which is technically an investment trust and therefore capable of being geared, with a gearing exposure (i.e. bank loans over and above shareholders' equity) of 16.1%.
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